Q: Does Mortgage Prequalification Affect My Credit Score?

A: Quick answer is no, but there are some things you will need to understand about applying for a mortgage to buy your first home.

You may have heard that credit checks hurt your credit, and that is true if you are applying with multiple lenders to see who will approve you for a loan. Lenders will see this as a red flag that they shouldn’t approve your loan because other lenders will not approve your loan. It should follow that if you apply for a loan with only one lender and they see a credit inquiry on your credit report that is the result of their credit check it should make ZERO difference as to their decision to approve or deny your loan.

Alas, we are on the subject so let’s make clear the difference between pre-approval and pre-qualification as well as credit score and credit history.

Pre-Qualification vs. Pre-Approved

A mortgage prequalification is the first step toward buying a home. The process varies by lender, but you can expect to be asked for some basic information about your financial situation. For example, a lender might want to know about your income, your monthly bills, how much you’ve saved for a down payment and how much you want to borrow. Don’t be afraid to ask the lender what you can do to improve your terms on a loan.

Lender’s typically do not verify anything about your financial situation during the pre-qualification process. Even so it’s best to be honest about your situation so they lender can make the pre-qualification as accurate as possible. A lender may check credit with a ‘soft pull’ which should have no affect on your credit score, but at some point you will have your credit pulled to secure your loan. Think of pre-qualification process as your opportunity to interview multiple lenders. When you find the one you like, move on to the loan application and get pre-approved.

Mortgage preapproval involves a more detailed review of your finances by a lender. Preapproval determines how large a loan the lender expects to offer you and the interest rate and fees you can expect to pay on that loan. You can expect to provide proof of the financial picture you painted during the pre-qualification process. You might have to provide paycheck stubs, bank records, and other information in addition to the the credit report.

Pre-approval doesn’t guarantee you’ll get a loan, but the lender has expressed confidence that your current financial picture makes you loan worthy. Pre-approval is about as close as you can get to full approval without designating a specific property you want to buy. Yes, you get approved for the loan BEFORE you find a house.

When you are pre-approved for a mortgage, the lender gives you a pre-approval letter which typically details their willingness to issue you a loan, and the terms of that loan. Your buyer’s agent will attach that letter to an offer on a house when you find one. Seller’s typically will not accept an offer without some sort of assurance that you have the money. In the 2020-2021 housing market it wasn’t unusual to see seller’s deny showings to buyers without financing or proof of funds.

Seller’s be like this:

Credit Score vs. Credit Report

From the CFPB*: “Your credit reports and your credit scores are two different things. A credit report is a statement that has information about your credit activity and current credit situation such as loan paying history and the status of your credit accounts. Your credit scores are calculated based on the information in your credit report.”

There are three companies that collect and use information about your finances to create your credit scores. Those three companies are Equifax, Experian and TransUnion and you will see that you have three different credit scores, though they are generally in a close range to each other. If you Experian has your credit score at 729 and TransUnion has your credit score at 736, it should become really clear that the mortgage pre-approval process dropping your score one to three points means NADA!

What lenders care about is your financial history as detailed in your credit report. First and foremost, they want to see that you pay your bills on time consistently. Lenders want to see that you do not owe anyone else so much money that they may never get repaid for loaning you more money. It is really no different than if a friend asked you to loan them some money when you know they still haven’t paid back Becky. Regardless of how you feel about Becky, you know them, you can make a pretty good guess as to whether or not they will repay you based on your friend’s observable history.

But we have also had those friends who were always broke and managed to turn things around. So if that friend you wouldn’t lend money is you, fear not! Ask the lender during the interview process A.K.A. pre-qualification what you can do to improve your ‘worthiness.’ The one that is most willing to help you even though you were denied a loan is most likely the one you want to call up when you turn things around.

*The Consumer Financial Protection Bureau (CFPB) is a great resource for you to learn more about finances. The CFPB covers everything from bank accounts and credit cards to car loans and student loans.